Whether it’s an inheritance, a refund from your taxes, money from your side hustle, that “extra” paycheck in the year (if you get paid bi-monthly, March or August might be the time, depending on your pay schedule) or a bonus from work, there are endless possibilities for how you can put this money to good use.
Examples include saving money in an emergency fund, paying down debt or contributing more to your retirement account. Whatever you decide to do really depends on your particular situation. If you have debt you want to pay off, start there. If you know you need to beef up your savings, open an online savings account.
Here are five smart ways to use your extra cash.
1. Pay down credit card debt
Credit cards are convenient to use and great if you understand how to reap bonuses without getting charged interest or falling into the trap of long-term debt. A poll revealed that 56 percent of credit cardholders with balances have carried them for more than a year.
Interest rates on credit cards are likely higher than other types of loans, such as your car loan or student loan. At the time of writing, the average interest rate on a credit card is 16 percent.
Make a plan to strategically pay off your cards over a certain time frame. Start with your highest interest credit cards, such as department store cards. Or, you can start with your lowest balances first to knock out it out quickly and move on to the next card.
2. Pay off your loans
Student loan debt is the second-largest source of household debt, after mortgages, with the average student loan recipient carrying $37,000 in debt at the time of their graduation. If you have private loans, you may face high interest rates, and some rates may even be variable.
Just like credit cards, pay off your loans and start with the highest interest.
Then, go down the list — this may mean clearing out smaller, lower-interest debt, such as paying down your personal or car loans. While the interest rates on these may be significantly lower, paying them down could help you achieve some peace of mind.
Having lower overall debt is always a good thing, especially since your money situation may change over time. You may not always have the same income or may face more challenging times in the future, so having less debt to worry about is important.
3. Start an emergency fund
If you don’t have an emergency fund, now is a great time to start one. Only about three in 10 Americans have $1,000 or more in a savings account. For most people, an unexpected dental or medical issue, car troubles or job loss would prove detrimental to their finances.
An emergency fund is your safety net so you don’t get financially crushed by these unexpected events. Having the funds is also crucial so you don’t have to use your credit cards (and rack up debt), or borrow money from family or friends.
Aim to put away six months to a year’s worth of expenses into your emergency fund.
4. Put it away in your long-term investment accounts
Do you know how much you’ll need when you retire?
Vanguard founder Jack Bogle said that investing for the long term through low-fee index funds is arguably the best way to grow your money. Bogle and investing phenom Warren Buffet believes an index portfolio of 90 percent S&P 500 and 10 percent treasury bonds is the best bet for most investors.
Both advise keeping it simple with index funds, as they generate the highest returns for the lowest risk over time.
Use your funds to open a retirement account or contribute more money.
These are three investment accounts to consider for growing your money, long-term:
- Roth IRA: This is an individual retirement account that allows you to save after-tax income of $6,000 per year. If you’re over the age of 50, you can contribute $7,000. The earnings on a Roth IRA are tax-free and withdrawals are also tax-free, as long as you make the withdrawals after the age of 59 ½.
- Traditional IRA: This is slightly different than a Roth IRA. Your contributions may qualify for a deduction on your tax return and any earnings may grow tax-deferred until you withdraw them at retirement. Investors who choose a Traditional IRA predict they’ll be in a lower tax bracket when they retire. This means paying taxes on a Traditional IRA may cost less.
- Peer-to-peer investing: Also known as Peer-to-peer (P2P) lending, this type of investing allows individuals to get loans directly from other individuals, cutting out the bank or financial institution as the middleman. These types of investments generally have excellent returns and are easy to sign up for, especially with the rise of robo-advisors to help you choose funds and even individual stocks.
5. Open an online savings account or CD
If you can’t figure out where you want to park your money, you can always open a free online savings account or a certificate of deposit (CD) and at least earn some interest while you think it over.
Online-only banks offer a higher interest rate than your big bank’s checking or savings account. The same goes for a CD, but keep in mind, you may not be able to access your money depending on the term you choose.
Pay off debt or save?
There are naysayers that advise against paying down lower (in the 4 percent range) interest loans. Instead, they recommend investing that money, since you could potentially earn 7-8 percent or more a year in interest. However, investments aren’t always guaranteed.
Achieving a debt-free status is a step towards financial freedom and reducing stress. The choice lies in what’s important to you and your lifestyle.
Extra cash is always a good thing
Paying down debt, creating an emergency fund and investing in your future are all smart ways to use your extra cash. Whatever you decide to do with your funds depends on your goals and priorities.
